Income Statements

Question 1

What is an income statement?

Answer 1

an annual legally required financial document that summarises a business’s historic activity (sales revenue) and expenses to show whether it has made a profit or loss over a time period

Question 2

Why are there different measures for profit?

Answer 2

To identify issues in stages

Question 3

How do you build a income statement?

Answer 3

Revenue
Costs of sales
 - Gross profit
Fixed overheads
- Operating profits
Net financing costs
- Profit before tax
Taxation
- Profit for the year

Question 4

Give an example of an income statement

Answer 4

revenue = 100'000
costs of sales = (40'000)
- Gross profit = 60'000
fixed overheads = (25'000)
- Operating profit = 35'000
net financing cost = (5000)
- Profit before tax = 30'000
taxation = (5700)
- Profit for the year = 24'300

Question 5

What is revenue?

Answer 5

money in from sales

Question 6

What is cost of sales?

Answer 6

direct variable costs from production

Question 7

What is gross profit?

Answer 7

gross profit = revenue - cost of sales

Question 8

What are fixed overheads?

Answer 8

other expenses that are fixed costs

Question 9

What are operating profit?

Answer 9

operating profit = gross profit - fixed overheads

Question 10

What are net financing costs?

Answer 10

interest = can be additional or negative
eg bank loan interest (NEGATIVE)
eg bank investment (positive)

Question 11

What is profit before tax?

Answer 11

profit before tax = operating profit - net financing costs

Question 12

What is taxation?

Answer 12

the standard rate of profit before tax = 19%

Question 13

What is profit for the year/net profit ?

Answer 13

Net profit = profit for the year - taxation

Question 14

What is the best indicator for internal performance?

Answer 14

operating profit as it is inclusive of only internal issues

Question 15

What can owners do with net profit?

Answer 15

• re-invest it
• put it into research and development
• dividends for shareholders
• keep it for savings and security

Question 16

What stakeholders are interested in an income statement?

Answer 16

employees
shareholders
suppliers
management
government
future potential investors

Question 17

Which profit are employees most interested in?

Answer 17

net profit = job security and wage negotiations

Question 18

Which profit are shareholders most interested in?

Answer 18

net profit = for dividends, shares and success and trends

Question 19

Which profit are suppliers most interested in?

Answer 19

net profit = charge more, cost of sales, how much they are costing

Question 20

Which profit is the management most interested in?

Answer 20

profit before tax = see internal performance

Question 21

Which profit is the government most interested in?

Answer 21

taxation and net profit = see success and potential performance

Question 22

Which profit are future potential investors most interested in?

Answer 22

net profit = performance, potential dividends

Question 23

What is profit utilisation?

Answer 23

is the way in which profit is used ie :
distributed to shareholders
re invested
retained profit

Question 24

What is profit quality?

Answer 24

a measure of whether profit is sustainable in the long-run.

Question 25

What is high quality profit?

Answer 25

this is profit that continues in the future

Question 26

What is low quality profit?

Answer 26

this is profit that arises from exceptional or extraordinary circumstances that are unlikely to continue

Question 27

What is window dressing?

Answer 27

representing accounts in a favourable light

Question 28

What are methods window dressing?

Answer 28

Revaluation of land and buildings
Depreciation of fixed asset
Sale and leaseback
Bringing forward sales and delayering expenditure
Boosting intangible assets

Question 29

What is revaluation of land and buildings?

Answer 29

Land and buildings can increase in value over time.

Businesses may obtain a recent valuation in order to show this increase

Question 30

What is depreciation of fixed assets?

Answer 30

a firm may over-estimate residual value of assets or lifetime in order to keep expenses lower.

Question 31

What is sale and leaseback?

Answer 31

Selling assets and then renting them back.

They have cash the sales but have to pay rent

Question 32

What is bringing forward sales or delayering employees?

Answer 32

When a business encourages customers to place an order at the end of the financial year rather then the next. May offer a discount or special offers to persuade them. This makes sure that any income is boosting the end result in the year.

Question 33

What is boosting intangible assets?

Answer 33

The value of goodwill and brand names can be increased. Examples such as logos, slogans, assets that arent physical can be valued and boosted.